Pandemic Impacts Canadians' Retirement Plans

Hilary Punchard of BNN Bloomberg reports that according to a recent CIBC poll, 4 in 10 Canadians are worried about COVID-19’s impact on their retirement plan:

Canadians are becoming increasingly concerned about the impact that the COVID-19 pandemic will have on their retirement savings, according to a new CIBC poll.

The findings, published Thursday, found four out of 10 Canadians are worried about how COVID-19 will affect their anticipated lifestyle in retirement, with 23 per cent of respondents unable to contribute to their retirement savings since the pandemic began.

Of those Canadians who feel COVID-19 has impacted their post-work future, 30 per cent said they will need to postpone retirement due to a loss of household income.

The pandemic has also grounded many Canadians’ expectations of travel during retirement, with almost one-third (32 per cent) saying they no longer plan to travel or will travel much less than they’d planned.

On the bright side, it seems the past few months have convinced some Canadians about the importance of saving.

According to the survey, one-in-five Canadians said they’ve realized that they need to pay more attention to their personal finances, and 19 per cent think it’s important to save for their future.

So what exactly did this CIBC poll say? Here is the press release:

A recent CIBC survey finds that the pandemic has impacted Canadians' savings and their anticipated lifestyle in retirement. Four out of 10 (40 per cent) respondents worry about the effect of COVID-19 on their savings and retirement plans, with almost a quarter (23 per cent) unable to contribute to their retirement nest egg since the pandemic began. 

Of those who feel COVID-19 has affected their retirement plans, many feel their expected vision for their post-work lives has changed. Almost a third (32 per cent) no longer plan on travelling or will travel much less than planned. Many Canadians also feel they will need to work longer than expected – for 30 per cent, this is due to a COVID-19-related loss of household income, and for 26 per cent, they feel the pandemic has significantly increased the cost of retiring. Additionally, out of those who intended to downsize their primary residence in their golden years, 40 per cent are now unsure of the right time to make this move.

A higher number of men (68 per cent) say they feel confident about managing investments in retirement, compared to women (57 per cent). Women are also more likely to turn to friends and family for retirement advice (25 per cent), whereas many men (23 per cent) claim they make all decisions about money matters on their own.

"This is a pivotal time to get advice about your ambitions for retirement," said Laura Dottori-Attanasio, Group Head, Personal and Business Banking. "An expert can help re-assess your financial plan, create new estimates for retirement income, identify ways to improve cash flow and adjust timelines if needed to meet your overall goals."

The survey also found:

  • 26 per cent of those between the ages of 34-55 and 20 per cent of Canadians over the age of 55 have been unable to contribute to retirement savings since the pandemic began
  • Of those who feel COVID-19 has affected their retirement plans, 24 per cent say the pandemic has made them realize they can live with less and will significantly reduce their discretionary spending in the long-term
  • Lessons Canadians say they've learned during the pandemic include: there's a need to pay more attention to personal finances (20 per cent); not to panic when markets get volatile (21 per cent); and it's important to save for retirement/their future (19 per cent)

To help Canadians with retirement planning amidst the pandemic, CIBC is hosting a free webinar (in English and French) featuring a number of financial experts on November 3rd, 2020. For more information and to register, visit the website here.

I have to laugh and cry when I read this:

A higher number of men (68 per cent) say they feel confident about managing investments in retirement, compared to women (57 per cent). Women are also more likely to turn to friends and family for retirement advice (25 per cent), whereas many men (23 per cent) claim they make all decisions about money matters on their own.

Laugh because men are always so foolishly overconfident about how they invest even though it's well known women are better long-term investors and cry because COVID-19 has disproportionately impacted women working in the leisure & hospitality industry and women are far more likely to succumb to pension poverty (for all sorts of reasons but the main one is female participation rates in pension plans have not increased substantially for almost a decade).

Now, has COVID-19 added to Canadians' retirement angst? 

No doubt about it, even if the stock market is well off its March lows, a lot of people are worried about their retirement because interest rates are at historic lows, volatility is high and a common and valid concern people have is whether they will outlive their savings. 

In late September, I had a conversation with Steven McCormick, SVP, Plan Operations at HOOPP, about research they commissioned showing amid the financial hit of COVID-19 – three out of four Canadians would choose greater retirement security over more money now.

Why would Canadians opt for greater retirement security over more money now? A lot of reasons, chief among them, they see the value of a good pension and I believe most Canadians are now confronting the brutal truth on DC plans, namely, they're not a real pension they can count on.

Remember, the gold standard of pensions is a well-governed defined-benefit (DB) plan like most public-sector employees enjoy. They pay into that pension over many years and when the time comes to retire, they can count on their monthly pension payments for the rest of their life.

These are professionally managed pensions where longevity and investment risks are pooled and assets are managed in the best interests of members.

There are two other pension categories.

Quebec's Government recently introduced a new supplemental pension plan. Bill 68's main purpose is to provide a supplementary retirement savings option for Quebec workers by paving the way for the implementation of a new type of pension plan, namely a Target Benefit Pension Plan (TBPP):

TBPPs combine characteristics of defined benefit plans with those of defined contribution plans. As is the case for defined contribution plans, the employer contribution to a TBPP is limited to the amount stipulated in the plan, while risks associated with longevity and return on savings are borne by workers and retirees. However, like defined benefit pension plans, TBPPs offer their members benefits at a certain level that, as opposed to the prevailing situation for defined benefit plans, may be amended according to the plan's evolving financial situation, including the possibility of pensions being reduced.

TBPPs are much better than defined-contribution plans but nowhere near as solid as well governed DB plans, so I'll ascribe them the silver standard of pensions. (I know, retired actuary Malcolm Hamilton likes TB plans, thinks they are fairer for taxpayers but I disagree with him on that point).

The bronze standard goes to defined-contribution (DC) plans which are just another supplemental savings program, offering no guarantees whatsoever as they typically fluctuate with the vagaries of markets and they do not offer their members benefits at a certain level. 

Without being too much of a doomsayer, with a DC plan, if you retire during a bull market, you're lucky, if you retire during a bear market, you're screwed. 

There's a reason why DC plans are "cheap", you get what you pay for. 

Companies love them because they offload pension risk onto employees but for the overall economy and retirement system, they are terrible because they fall well short of covering the retirement needs of pensioners.

Remember, as more and more people retire, those that have certainty of income can spend more during their retirement years and that generates more economic activity and more sales and income taxes for governments. 

Canada has the world's best DB pensions but our retirement system doesn't crack the top five in the world, mainly because we aren't covering enough people with well governed DB plans.

Yesterday,  I had a Zoom meeting with McGill Finance professor Sebastien Betermier and McGill Finance student Tania Kuoh, one of the MPIC organizers, and told them I've long argued we need to create a new pan-Canadian pension fund that amalgamates all corporate DB and DC pensions (no matter how well or poorly they're doing) to cover the retirement needs of many working Canadians that work in the private sector.

This new federal public pension fund should be based in Montreal (Toronto has enough already) and it will be modeled after CPP Investments and PSP Investments.

I've been saying this for years. The federal and provincial governments would force companies to give up control of their pensions and pass their pension plan risk onto this new entity which will have the backing of the federal government. 

Given the ultra-low rate environment is here to stay, most companies will gladly pass on this risk to a new federally backed pension pan.

Mr. Trudeau, are you listening? Or or do I have to get my younger brother who was your classmate at Collège Jean-de-Brébeuf to reach out to grab your attention? Great school, he went on to become a psychiatrist and you went on to become the Prime Minister of Canada and you both share some similar left-leaning liberal economic views.

I'm not coming at this issue from the Left, in fact, I'm coming at it from the Right of center and as I keep stating on this blog, good retirement policy translates into good long-term economic policy.

"But Leo, the big banks and insurance companies will fight this proposal tooth and nail."

Yeah, so what, screw them, they've enjoyed enough monopoly power over the last three decades and our retirement system hasn't gotten better.

I want all the key policymakers reading this blog to open their ears: it's time we start doing some "radical things" in Canada to bolster our retirement system for good and catapult it into the top spot. 

I say radical but this and other proposals I'm proposing aren't radical to me, only to those who have vested interests against improving our retirement system.

If it's one thing I want all of you to keep in mind, it's the following:

  • Ultra-low interest rates are here to stay, the world is still in the grips of a long bout of deflation (never mind inflationistas, they're delusional).
  • Unprecedented monetary and fiscal stimulus in response to COVID-19 was needed but it increased debt massively and only front-loaded future growth forward. It also exacerbated inequality to unprecedented and dangerous levels.
  • What this means is future returns are necessarily going to be a lot lower than the last ten years, and along with ultra-low rates, this places immense pressure on global retirement systems.
  • Both private and public pensions are going to go through a period of immense weakness and turbulence over the next decade.Millions of people will succumb to pension poverty, especially in countries with weak pension systems.
  • Canada isn't one of them but there's a lot we can do to bolster our pension system and I'd begin by creating a new federal public pension which amalgamates corporate DB and DC plans (you force them to join, no exceptions). 

Those are my thoughts on this Election Tuesday where my buddies keep texting me: "Who do you think is going to win?"

So let me state this publicly, I think Biden will win but it's going to be very close and I hope the Senate remains Republican so we have some gridlock. 

Four more years of Trump? It's possible but I think the world can't handle it, too much volatility and acrimony.

Also, don't be surprised if there isn't a clear winner until Friday given that almost 100 million people already voted and many mailed in their ballots.  

Of course, more uncertainty is bad for the stock market which rallied sharply on Monday and Tuesday (I expect a big selloff is coming for the rest of the week).

Those are my thoughts on US elections. 

One last important thought. Whoever the next President of the United States is, they better address growing retirement angst there too and can learn a lot from Canada.

Below, Ivana Zanardo of HOOPP and Alex Mazer of Common Wealth hosted a webinar with panelists Elizabeth Mulholland of Prosper Canada, Eleanor Marshall of Bell Canada and Renée Légaré of The Ottawa Hospital to discuss the financial implications of COVID-19 for Canada’s workforce and how employers can support their employees, while also creating greater long-term business value for their organization.

Despite temporary measures put in place to support Canada’s workforce during COVID-19, many Canadians are facing a crisis of financial security. With so much uncertainty ahead of us, what can be done to improve the financial security of these workers? Listen to this great discussion, it's excellent.

Update: Bernard Dussault, Canada's former Chief Actuary, shared his thoughts on target-benefit (TB) plans:

As you already know, I do not see a need for Target Benefit Pension Plans (TB) in the Canadian pension landscape, as substantiated in my attached counterproposal to Bill C-27 (see a previous comment of mine here).

TB plans were “invented” by Morneau-Shepell in the midst of New Brunswick early 2010 financial issues. These were provincial financial issues that were addressed by replacing the NB public servants DB plans on January 1, 2014 by the so called Shared Risk plan (actually a TB plan “risk-shared” entirely by plan members), while these prior DB plans proved to have no deficit when the NB TB plan was introduced on January 1, 2014.

Obviously therefore, I am disappointed whenever a DB plan is converted into a TB plan, to which the Quebec supplemental plan will open the door.

I thank Bernard for sharing his insights with my readers.